Geopolitical tensions remained firmly in focus on Wednesday as the Middle East conflict entered its 11th straight day of US military strikes and spilled into the Red Sea, keeping Brent crude hovering near $95 a barrel. However, outside the energy market, investor reactions have remained noticeably restrained. Asian stocks finished mixed, major European indexes traded slightly higher, and US stock futures fell only slightly, suggesting that markets are resisting the kind of broad-based risk-off moves usually associated with a deepening regional conflict.
Speaking during the Association of Southeast Asian Nations (ASEAN) foreign ministers’ meeting in the Philippines today, US Secretary of State Marco Rubio stressed that Washington remains open to a diplomatic solution with Iran. He said that the United States would welcome an agreement under which Tehran would abandon its support for terrorism and its pursuit of nuclear weapons. At the same time, Rubio questioned Iran’s willingness to negotiate in good faith, and accused Tehran of violating within weeks the commitments made under the memorandum of understanding signed last month. He also adopted a tougher tone on maritime security, rejecting Iran’s implicit authority over the Strait of Hormuz and describing freedom of navigation as a fundamental principle. While stressing that diplomacy remains the preferred outcome, Rubio made clear that US forces would continue to protect commercial shipping and urged other countries to join those efforts.
However, investors seem to believe that the conflict is still largely under control, at least for now. Another factor limiting broader market movements is the focus on the busy US earnings calendar. Results from Alphabet, Tesla, IBM, ServiceNow, Texas Instruments and AT&T are expected to provide important insight into corporate spending, particularly whether the AI investment cycle will remain healthy. This has left equity investors weighing geopolitical risks against what could be an equally important catalyst for the market’s near-term direction.
The currency market painted a similarly accurate picture. Higher oil prices have investors pricing in greater potential for monetary policy tightening by the Federal Reserve, but dollar gains have been surprisingly limited. Instead of rising broadly, the greenback has largely traded within recent ranges against most major currencies. A notable exception was the Japanese yen, which continued its decline to another 40-year low as USD/JPY surpassed 163. Renewed verbal intervention warnings in Tokyo had little lasting impact, while reports that Bank of Japan officials might be open to a faster pace of rate hikes ahead of next week’s policy meeting only sparked a brief bout of yen buying before selling resumed.
Meanwhile, gold and silver continue to challenge recent relationships. In previous periods of energy-driven inflation, higher oil prices have typically pushed up bond yields and the dollar, creating headwinds for precious metals. However, this time, both gold and silver continued to strengthen along with crude oil. Whether this reflects a temporary positioning, ongoing geopolitical demand, or the emergence of a broader shift in macro market behavior remains uncertain, but the discrepancy has become difficult to ignore.
The past two weeks suggest that investors are becoming more selective in how they price geopolitical shocks. Energy markets are still bearing the brunt of rising tensions, but stocks remain supported by earnings expectations, the dollar is struggling to establish broad-based momentum despite renewed hawkish Fed bets, and precious metals are behaving differently from oil’s previous inflation-driven rallies. Whether these differences are temporary or represent the beginning of a new market order, may become one of the crucial questions for investors in the coming weeks.
Yen Hits 40-Year Low Can Japan Still Defend Its Currency?
The Japanese yen fell to a new 40-year low, with USD/JPY breaking above 163 and attention shifting from whether Japan will intervene to whether intervention can still make a lasting difference. While markets expect officials to step up verbal warnings and perhaps drive expectations for faster rate hikes from the Bank of Japan ahead of the July 31 meeting, Japan faces a deeper dilemma. Wider global yield spreads, higher oil prices and growing pressures in the domestic bond market mean policymakers have few free options, leaving the yen’s long-term outlook tilted to the downside despite the risk of sharp declines from intervention. Read more.
Gold challenges rising oil prices and yields. Is the market entering a new system?
Gold’s rise above $4,100 represents a challenge to one of the prevailing market themes of recent months. Despite Brent crude rising above $92, US Treasury yields rising to 4.63%, and markets anticipating a 71% probability of a rate hike by the Fed in September, gold and silver continue to advance. This divergence suggests that investors may be shifting from viewing rising oil prices primarily as an inflation and interest rate story, toward viewing it as a broader geopolitical and inflationary risk. While it is too early to announce a permanent change to the system, the combination of improving technical factors and an unusual macro backdrop makes this move one of the most important developments of the week. Read more.
UK CPI slowed to 2.6%, but steady core inflation keeps the Bank of England cautious
UK inflation gave a mixed signal in June. Headline CPI slowed from 2.8% to 2.6%, beating expectations of 2.7%, while monthly inflation matched expectations at 0.1%. However, core CPI remained steady at 2.6%, above expectations of 2.5%, suggesting that underlying price pressures remain steady. Although goods and services inflation eased, the report is unlikely to change the Bank of England’s policy outlook, supporting expectations that interest rates will remain unchanged for the time being. Read more.
Japan’s exports rise most since 2022 on weak yen, but oil-driven imports push trade back into deficit
Japan’s exports accelerated from 16.8% to 19.3% year-on-year in June, the strongest growth since November 2022 and above expectations, as semiconductor equipment shipments and a weak yen lifted export values. However, trading volumes increased by only 0.2%, while imports rose by 25.4% due to a 59.3% rise in oil imports, pushing the trade balance to a deficit of 406.9 billion yen. Read more.
Daily forecast for EUR/USD
EUR/USD intraday bias remains neutral with continued consolidation above 1.1323. With support at 1.1499 turning into healthy resistance, further decline is expected. On the downside, a break of 1.1323 will resume the decline from 1.2081 to 100% prediction from 1.2081 to 1.1408 from 1.1848 at 1.1175. However, a decisive break of 1.1499 will bring back the upside bias to resistance at 1.1621.
In the bigger picture, focus is back on the 38.2% retracement level from 1.0176 to 1.2081 at 1.1353. A decisive breakout there would revive the medium-term bearish trend reversal case after the rejection of the 1.2 key cluster resistance level. Further decline we should see to 61.8% retracement levels at 1.0904. However, a strong bounce from 1.1353, followed by a break of resistance at 1.1621, will sustain the upside in the medium term.
